02nd November 1997

GL paints 'pretty good picture'

By Ruvini Jayasinghe

Deputy Finance Minister, Prof. G.L. Peiris who took centre stage in national politics when he presented constitutional reforms in parliament last week, will remain in the spotlight as he presents the People's Alliance's fourth national budget in just three days, on Wednesday, November 5th.

In a special pre-budget interview with The Sunday Times Business last week, Minister Peiris taking stock of the country's economic performance in the 10 months of 1997, said that "it has been pretty good in the circumstances."

Without direct reference to the PA 's fourth budget, Prof. Peiris focussed on some vital sectors of the economy which received special attention in 1996, and their progress so far, indicating that these sectors will remain priorities in the immediate future.

Manufacturing, energy, telecommunications, plantations and export sectors received special attention and incentives in 1996, and have indicated a higher level of performance in 1997, he said.

Amidst the buoyancy triggered by positive economic indicators is the stark fact that 30% of the government's revenue or Rs.44.999mn will be is spent on fighting the ethnic war next year.

The government's total expenditure as presented to parliament in the Appropriation bill of October 7th is estimated at Rs.306.749bn while total revenue is estimated at Rs.208bn.

Following the general pattern in past years, the Rs.186bn for recurrent expenditure exceeds allocations of Rs.120.7bn for capital expenditure.

The budget deficit of Rs.99.589 bn or 7% of GDP, overshot the targeted 6.1% of GDP (as reported in the Central Bank Annual Report 1996) and is above last year's deficit of 6.6% of GDP.

In 1983, identified by defence analysts as the beginning of the war, defence spending was only 3% of government revenue, the Minister said. In approximately 15 years, the amount has increased ten times over.

By 1996, defence expenditure has risen to 5.7% of GDP and in 1997 defence spending will be about 5% of GDP, the Minister said.

"But the government needs no apology for this spending," he said, explaining that winning the war and negotiating a political settlement to the ethnic crisis was a national priority, supported by the majority of people.

Revenues from the defence levy contribute considerably to war spending, the Minister said. The 1% defence levy (imposed on all manufacturing, financial services and import sectors) in January 1992, was increased to 3% in May 1993, 3.5% in 1994 and 4.5% in 1995.

"But our government reduced the levy to 2% for capital goods and further to .05% in 1996, Prof. Peiris said. The government hopes to collect Rs.18.4bn from the defence levy this year, he added. In 1996, the collection was Rs.6.4bn and in 1995 Rs.14.4bn.

Certain sectors of the economy may be shaken but not blasted by the October 15th bomb explosion right in the heart of the financial hub of the capital, and economic growth will only slow down to 6%, from the targeted 6.3%, the Minister said.

Despite setbacks we have achieved a Balance of Payments (BOP) surplus of US$ 235 million, for the first six months of the year, he said . Our foreign reserves at US$2.5bn is five and a half months of imports, he added.

The BOP surplus is attributed to four main factors; increased private transfers, privatisation proceeds, capital flows, with the single largest being the US$50mn from a floating rate note issue, and higher tourist arrivals, the Minister said.

External trade has been virile in the first half of the year Prof. Peiris said with exports rising by 18% and imports by 19%.

A prime indication of a health of an economy is the increase in intermediate and investment goods, the Minister added. Intermediate goods imports rose by 22% and investment goods by 19% in the first half of this year as compared to the same period last year, Prof. Peiris said.

Port services and tourism were two sectors that contributed largely to the increase in external trade in the first half of the year, the Minister said. Ship arrivals were up by 17% and container traffic in volume terms by 26% by the end of June.

In the manufacturing sector output rose by 12% and private sector manufacturing output rose by 15% in the first six months of 1997.

Export oriented manufacturing indicated an even better performance level, he said. August trade data indicate a 23% growth in garments and textiles in the first eight months of the year.

Total industrial exports including gems and processed diamonds grew by 20% in the first half of the year, he said.

Increasing employment levels is a national priority and the 5% growth in the non-BOI sector in the first half of the year is an encouraging sign, the Minister said.

Investments are 26% of GDP and national savings are 21% of GDP, he added. The debt service ratio had come down to 13%, he added.

In the aftermath of the 1996 energy crisis, the 40MW diesel plant at Sapugaskande and 115MW gas turbines at Kelanitissa have increased thermal power from 19% to 31% in just one year, making the country less dependent on the elements, the Minister said.

The country's single largest foreign direct investment so far, the US$225 million for 35% and management of Sri Lanka Telecom by Japanese telecom giant NTT, has made a phenomenal change in the sector, the Minister said. In the six months the number of subscribers has increased by 42% with 64,000 new subscribers he said.

Even tourism, possibly the worst hit in the recent bomb explosion, will sustain a 18% growth, 5% below the targeted growth of 23%, Prof. Peiris said.

The expansion of private sector credit has been another encouraging factor, with commercial banks extending Rs.11.3bn additional credit to the private sector in the first eight months of 1997, the Minister said.

This increase includes US$ 80 million net credit under the new foreign currency loan scheme, expected to rise to US$ 100 million by the end of the year. Prof. Pieris added that non-BOI exporters have also access to this credit.

Credit expansion was a direct result of commercial banks' reserve ratios being reduced by 3% to 12 %, releasing a total of Rs.18bn into the monetary system, he said.

The majority of commercial banks have reduced lending rates in response to monetary policy changes and the average prime lending rate has dropped by 6% percentage points to about 13.8% he said, making it clear that there will be no major shift in the policy in the immediate future.

Pinning hopes on 'business' friendly budget

By Asantha Sirimanne

The private sector is hoping for a business friendly budget to spur investment and growth in the aftermath of the Colombo bomb blast and international capital market turmoil.

The government is expected to bring in proposals in the budget to bring down a projected deficit of about 7 per cent of GDP to slightly over 5 per cent of GDP after the proposals.

"It is crucial that we have a good prudent budget that would send the correct signals to revive investor confidence," says Dr. Anush Amerasinghe of SocGen Crosby Securities.

"The macro-scenario is getting better," says Azra Jafferjee analyst at Jardine Fleming HNB Securities. "Though investment incentives had been given earlier the conditions have not been right to make full use of them."

The budget deficit has been coming down steadily during the last three years. This year in particular the tendency for runaway expenditure has not been evident. Though some of last year's targets have slipped marginally, projections of GDP growth and balance of payment surplus seem to be on track.

Fund flows from privatisation and debt retirement had left the government with more room to manoeuvre this year. Another plus factor is the low domestic interest rates, given that nearly Rs. 370 bn of government debt is domestic.

There could be savings in excess of Rs 10 bn on interest payments next year.

In line with declared government policies, income tax rates and tariff bands are also expected to be reduced and a firm stand also taken on GST for which legislation has already been passed.

The capital markets in particular are looking to benefit from a 5 per cent reduction in corporate taxes to 35 per cent, which will be an incentive for more companies to get a listing.

"This will improve the earnings of companies and increase funds available for re-investment," Allied Philips Securities Head of Research Nouzab Fareed said.

The capital market is also expecting a relaxation of exchange laws to enable foreigners to deal in listed corporate debt instruments, to create a secondary market in debt.

There have been only one debenture issue listed in Colombo, and very little secondary trading has taken place so far.

In another development, foreigners have been given the go ahead to buy Vanik debentures after the Forbes take-over was approved by exchange control.

With Vanik's take-over of Forbes being approved, the purchase of Vanik debt by the sellers of Forbes shares have received the nod from the authorities.

A lifting of stamp duties could also help bring in new issuers of debt. Though a lifting of stamp duty was expected last year, stamp duty was doubled in the budget.

The government would also have to rely less on privatisation for revenue this year, with 1996 bringing at least Rs 21 bn.

"We cannot expect more than Rs 4 to 5 bn from privatisation," says Rajiv Casiechetty, Research Manager at C. T. Smith Securities. Even if the AirLanka sale went ahead most analysts feel it would bring in only about Rs 4 bn.

But a relaxation of existing rules to permit foreign investment into the insurance sector would pave the way for the privatisation of the two state-owned insurance firms. This would also have a positive impact on the shares of listed insurance companies.